Post feedTrade Salvaging, Flipping, Marinated, Glazed & Served
There was a great post from someone the other day about how they had taken a losing trade, sold more contracts against this losing position and happened to make a few bucks in the end. I am very pleased that this experience was shared with the group. While I am amazed this one worked, I am glad people were able to hear a success story of how this strategy could work.
In case you did not know, I am against this strategy 100%. In my experience and in my mind it does not work. However, there will be times when it can be used, it can work, and it can save a bad trade. But what is wrong with a bad trade?
I question the longevity of this strategy and the psychology behind it. There is no consistent method to always being right. Better yet, there is a serious flaw in the mind of an individual who cannot accept being wrong. Not only in trading, but in life in general. If you have studied the greats in our profession, you won't stumble across the trader who made it to where they were because they were always right. Most of these honest individuals will tell you that they are wrong a whole lot more than they are right, and that they are damn good at taking a loss.
Anyway: back to the topic. The problem is deciding when you are wrong, and then making the call that you can actually make a profit with the rest of the trade now at risk. Worse than that...what if you were actually right (which is the majority of the time, but your emotion doesn't let you see out the rest of your plan) the new additions you made to this trade wind up with a worse loss than what you would have had if you just got out of the trade.
Confused? Sweet!
Bottom line... I gave my opinion. I do not endorse this strategy. I do not wish to discourage those who use it. I express my concern that you use caution, and only use it when it is appropriate.
"Hey Jeff, when is this strategy appropriate?"
Aside from never... I would say when something dramatic changes. When you can see a stock is no longer moving in the direction you wanted it to go, and now you have evidence it will start gaining momentum in the opposite direction (earnings, news, broken support/resistance, etc). However, rather than salvage in this circumstance, I take the loss and enter a new position rather than trying to resuscitate the old one. I lay it to rest....
It is all part of the plan. Take your losses small, don't gamble with them very often. Gamble with your winners instead. Having a higher tolerance for making money and a low tolerance for losing it is where you'll find success.
Recommendation: Videos should be coming up shortly.
In case you did not know, I am against this strategy 100%. In my experience and in my mind it does not work. However, there will be times when it can be used, it can work, and it can save a bad trade. But what is wrong with a bad trade?
I question the longevity of this strategy and the psychology behind it. There is no consistent method to always being right. Better yet, there is a serious flaw in the mind of an individual who cannot accept being wrong. Not only in trading, but in life in general. If you have studied the greats in our profession, you won't stumble across the trader who made it to where they were because they were always right. Most of these honest individuals will tell you that they are wrong a whole lot more than they are right, and that they are damn good at taking a loss.
Anyway: back to the topic. The problem is deciding when you are wrong, and then making the call that you can actually make a profit with the rest of the trade now at risk. Worse than that...what if you were actually right (which is the majority of the time, but your emotion doesn't let you see out the rest of your plan) the new additions you made to this trade wind up with a worse loss than what you would have had if you just got out of the trade.
Confused? Sweet!
Bottom line... I gave my opinion. I do not endorse this strategy. I do not wish to discourage those who use it. I express my concern that you use caution, and only use it when it is appropriate.
"Hey Jeff, when is this strategy appropriate?"
Aside from never... I would say when something dramatic changes. When you can see a stock is no longer moving in the direction you wanted it to go, and now you have evidence it will start gaining momentum in the opposite direction (earnings, news, broken support/resistance, etc). However, rather than salvage in this circumstance, I take the loss and enter a new position rather than trying to resuscitate the old one. I lay it to rest....
It is all part of the plan. Take your losses small, don't gamble with them very often. Gamble with your winners instead. Having a higher tolerance for making money and a low tolerance for losing it is where you'll find success.
Recommendation: Videos should be coming up shortly.
Jeff, this is why I love the blog. A fellow I know is making a great living selling naked puts and calls on stocks that never go anywhere (ABX, for example.) He does have to use this method from time to time to salvage a trade gone bad, but it always works out in the end. The fact is... he loves that kind of steady income and doesn't really get caught up in the day to day activity of the market (although I know he's naked on $27.50 puts on ABX that he sells 3 months out, and I suspect that the bullets he's sweating now are near 45 magnum size beauties.)
The thing that I continue to find is that my entries are the vital part of my trades. I am STILL getting in at the wrong time when I see a big jump in a stock and then lose my 1% as it settles back a bit before rocketing upwards. I'm setting up one of those circus "ring the bell" thingys by my desk that will hit me on the head anytime I try to make a trade that way. DECK is a perfect example. 3 days ago it spiked and I thought "Holy moly, batman... here it goes." Bought at the end of the day and this morning I was down 1.5% on the trade and it's not anywhere near a bailing point. It's bounced back... but I bought at the wrong time. BONK!!!
Brett, is LCC ever going to stop? I got in very late on this one and have made 120% on it. You must have made enough to buy a small aircraft carrier. With it's own Mocha Maker. And gold plated anchors. Nice call on the whole industry.
Posted by
Chris and Catherine |
5/01/2007 10:56:00 AM
alright, jeff. i will cry, i mean, type some thoughts up and post them here soon. thanks for the willingness to help.
Posted by
Tim |
5/01/2007 11:04:00 AM
After looking at the components of the IYR..there are some nice set-ups appearing.
AIV...H&S
VNO...H&S
This one intrigues me as I have not traded this formation yet.
SPG looks to be an ascending wedge. Breaking lower out of the wedge to the downside. I project an 8 point move over 8 weeks.
Look Like a decent trade anyone.
Jeff, thanks for KIM. Cant' wait to see the video. I created a bearish watch list of all these REITS today.
Jamie
Posted by
Anonymous |
5/01/2007 11:04:00 AM
Very good point Chris...
Entry into a trade is an art...however if the right stocks are selected, it takes a lot of pressure off the entry. For example, your trade on GT, DRYS, CY, etc. You could have gotten in at any prior top, and it wouldn't matter as much today being up where the price has moved.
I think as long as your entries are based more on price action than technical indicators, you are on the right path. Of course if you need any suggestions or feedback, ask. I'm always willing.
JK
Posted by
Option Addict |
5/01/2007 11:06:00 AM
Great Scott, man!!!
How do you remember those trades? I have a hard time remembering what my name is in the morning, let alone my OWN trades.
DRYS is finally taking a hit today and may be setting itself up for a re-entry.
POT has pulled back and could be at a good entry point, too.
Posted by
Chris and Catherine |
5/01/2007 11:31:00 AM
I'm determined to become less of a lurker here so here's a post :)
I had always wanted to try writing covered calls just to experience how they work and through my searches a couple of weeks ago I came upon IIG. So that's what I'm using for my experiment. Bought the stock on 4/10 for 20.99. Waiting for a pullback to sell a call, possibly after earnings?...
AVB set up nice and I agree on the 110 target. Might take a bit to get there, but looks great to me.
What a cool blog eh? (for the Canadians)
Brandon Hann
Posted by
Anonymous |
5/01/2007 11:33:00 AM
I managed to unwittingly buy SPWR right at its peak yesterday (apparently just minutes before CY proceeded to sell 7.5 million of its holding of SPWR). It's now down about 8%. Rockin'!
My contribution to this blog will be inform y'all whenever I'm buying a "52-week breakout." (Yes, I know I should've waited till end of the day to confirm.) This way, y'all can load up on puts and cash in. I shall charge nothing for this service. I only ask that when you see me begging for change out in the streets in a few months, please spare me a buck or two so I can go buy myself a 40 oz of Steel Reserve!
Trent
Dallas (hey, my holdings are now matching the performance of the Mavericks!!)
P.S. Chris - do you think DRYS is good for re-entry? I'm now in it & was planning on getting out if it closes below yesterday's open.
Posted by
Anonymous |
5/01/2007 11:38:00 AM
Anonymous... don't be shy,
I bailed on DRYS at $25 because I thought it had run it's course. Do you really want advice from someone who did that? Personally I think it's got to pull back a ways here, and it could take a while. I'm going to watch it... but my advice is to ask someone else. Theoretically a guy should be right 50% of the time. The good thing is, I'm due to get my 50% any time now.
Hey, if you're matching the Mav's then you're doing well. Most of us don't do that well... but we're still makin' money.
Posted by
Chris and Catherine |
5/01/2007 11:48:00 AM
Great videos, thanks Jeff!
Posted by
Amy |
5/01/2007 11:54:00 AM
Well, meaning the Mav's in this playoff series...which ain't so great...
Amy, where did you find the videos? I'm not seeing them posted yet, and couldn't find today's videos on Youtube.
Trent
Dallas
Posted by
Anonymous |
5/01/2007 12:14:00 PM
Jeff, will you, please, elaborate a little on your "entries ... based more on price action than technical indicators," comment above?
Thanks!
Posted by
Joe Wood |
5/01/2007 12:24:00 PM
Trent, try this following website. It is the for the support bounces. After you reach this spot, you should be able to find the other video. Also, if you set up an account with YouTube, you basically bookmark Option Addict videos. I hope this helps.
http://www.youtube.com/watch?v=0ZW_PeOJHbM
Posted by
Amy |
5/01/2007 12:37:00 PM
Addicts,
Assuming you still have some money left after plunging on DECK and IIG today...
PENN and RS are ready to bust loose. Both present huge flag opportunities. Wait for confirmation, but i feel it's close.
"And when you speak of me...speak well..." (Crash Davis)
Also, if you exited ANF earlier today, that's why we wait until the final hour.
Posted by
Brett |
5/01/2007 12:42:00 PM
$$
Brett...
That is the (my) dilemma...
Low on trading capital...it's tied up already...dang....
I like the way RS is setting up...
I took IIG back on 4/19 at the close.. :)
Posted by
Raimo |
5/01/2007 12:50:00 PM
BOL
That's a flagpole....
Posted by
Raimo |
5/01/2007 12:57:00 PM
....or are you just happy to see me?
Posted by
Brett |
5/01/2007 01:00:00 PM
Brett...you really suck...
I just spit lemonade all over my monitor....
And I am still laughing..
Posted by
Raimo |
5/01/2007 01:03:00 PM
Joe,
What would you like me to elaborate on? Was there a specific question?
My meaning was "enter trades based on price movement, not on technical indicators."
Posted by
Option Addict |
5/01/2007 01:12:00 PM
Jeff,
I suppose that I'm showing my ignorance, but I thought price movement (action) and technical indicators are intertwined with each other. When I think of entering trades, I think of buying breakouts of symetrical triangles when they are associated with volumne. Or I think of buying when the price bounces off support.
I don't understand how you can have technical indicators without price action. What am I missing?
Posted by
Joe Wood |
5/01/2007 06:50:00 PM